Principal Issues: [TaxInterpretations translation] 1. Is the gain on the disposition of collectibles a capital gain or business income?
2. Does subsection 46(1) of the Act apply on the disposition?
3. Does subsection 46(3) apply to this situation?
Position: 1. Subject to a review of all the relevant facts, the gain could be taxed as a capital gain.
2. Subsection 46(1) applies because the objects in the collection are personal-use property.
3. There is insufficient information to take a position. However, if each of the objects is sold to a different purchaser, subsection 46(3) does not apply.
Reasons: 1. When he acquired the objects, he did not seem to intend to sell them but to keep them for personal enjoyment. The holding period is long. The taxpayer does not appear to be habitually engaged in activities that earn him a profit in connection with the collection. Nor is it an adventure or concern in the nature of trade.
2. The taxpayer holds the property for personal enjoyment which meets the definition of personal-use property in section 54.
3. Wording of subsection 46(3) of the Act. In addition, we cannot determine whether some or all of the items in the collection are interrelated.
XXXXXXXXXX Sylvie Labarre, CA
2004-007783
November 10, 2004
Dear Sir,
Subject: Collector's objects
This is further to your letter of April 2, 2004 in which you asked for our opinion on the tax consequences of the sale of objects from a collection with a XXXXXXXXXX theme. We apologize for the delay in responding to this request.
Facts
Mr. X had accumulated, over a period of 35 years, a significant number of collectibles with a XXXXXXXXXX theme. Those objects consisted mainly of XXXXXXXXXX, etc. Most of the objects were over XXXXXXXXXX years old.
The acquisition of those objects was motivated by Mr. X's passion for collecting objects from this period and not by the intention to make a business out of it. However, Mr. X was aware that most of the items in the collection had a market value in excess of their cost.
Over the years, Mr. X had exchanged and sold certain objects with the aim of obtaining new items for his collection.
Mr. X wished to dispose of the items in his collection. To achieve this goal, Mr. X visited an auction website. The items in his collection were sold one by one to different buyers.
Since his decision to dispose of his collectibles, Mr. X has not sought to acquire any new collectibles.
Most of the items in the collection were acquired for less than $XXXXXXXXXX. The market value of most items is also less than $XXXXXXXXXX.
Questions
You wish to know whether the profit from the sale of the items in Mr. X's collection is a capital gain or income from carrying on a business. If the profit on the sale of the property is a capital gain, you wish to know whether the property is personal-use property and whether the provisions of subsections 46(1) and (3) of the Income Tax Act (the "Act") will apply on its disposition.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
Whether a gain on the disposition of property is a capital gain or business income is a question of fact.
According to what you indicated, Mr. X did not seem to have, at the time of the acquisition of the elements of his collection, the intention to sell them but rather to keep them for his personal enjoyment. Furthermore, he acquired the items over a period of 35 years, which could also indicate that his intention at the time of acquisition was not resale. If Mr. X only made some occasional trades and sales that were for the purpose of acquiring new items and not for profit, it seems to us that Mr. X was not usually engaged in activities that could earn him a profit in connection with those items. (However, when considering the facts in a particular situation, it would have to be clear that the trades and sales were casual and were made to acquire new items and not for profit). Furthermore, based on the information provided, it does not appear that this would be an adventure or concern in the nature of trade under the criteria set out in paragraph 4 of IT-459. In these circumstances, subject to an examination of all the relevant facts in a particular situation and provided there was no change in the use of the objects when Mr. X decided to dispose of them, it is our view that the profit realized on the disposition of the collectibles held by Mr. X would be taxed as a capital gain.
We do not have sufficient information about Mr. X's activities in relation to the collectibles from when he decided to dispose of them to determine whether there was a change in use of the objects that could result in a deemed disposition of the objects pursuant to subsection 45(1). However, the fact that the objects were offered for sale on an Internet auction site is not, in our view, sufficient in itself to conclude that there was a change of use. For the present purposes, we have assumed that there was no such change of use and no conversion of the goods to inventory.
The term "personal-use property" is defined in section 54 and applies for the purposes of subdivision (c) of the Act (sections 38 to 55). Personal-use property includes property owned by the taxpayer that is used primarily for the personal use or enjoyment of the taxpayer. We are of the view that where a taxpayer holds property because of the taxpayer’s passion for a particular epoch, the taxpayer holds it for personal enjoyment. Consequently, we are of the view that the objects in the collection held by Mr. X, on the facts before us, were personal-use property. Since the objects in Mr. X's collection were personal-use property, the provisions of subsection 46(1) applied.
However, we do not have enough information to determine whether some or all of the items in Mr. X's collection are property that would normally be disposed of as a set. As noted in paragraph 14 of Interpretation Bulletin IT-332R, a set is a number of properties belonging together and relating to each other. Furthermore, for subsection 46(3) to apply, it is necessary, inter alia, that where a number of personal-use properties which would ordinarily be disposed of in one disposition as a set are disposed of in more than one disposition, they be acquired by one person or a group of persons not dealing with each other at arm's length. In this situation, if the property was sold to different purchasers who dealt with each other at arm's length, subsection 46(3) would not apply.
Note, however, that a loss resulting from the disposition of personal-use property other than listed personal property (as defined in section 54) is nil. We do not have sufficient information regarding the nature of your objects to determine whether any of them are listed personal property.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch